Question

Construct and Interpret a Product Profitability Report, Allocating Selling and Administrative Expenses

Naper Inc. manufactures power equipment. Naper has two primary products—generators and air compressors. The following report was prepared by the controller for Naper's senior marketing management for the year ended December 31:

	Generators		Air Compressors			Total
Revenue	$4,200,000			$3,000,000		$7,200,000
Cost of goods sold	2,940,000			2,100,000		5,040,000
Gross profit	$1,260,000			$900,000		$2,160,000
Selling and administrative expenses						610,000
Income from operations						$1,550,000

The marketing management team was concerned that the selling and administrative expenses were not traced to the products. Marketing management believed that some products consumed larger amounts of selling and administrative expense than did other products. To verify this, the controller was asked to prepare a complete product profitability report, using activity-based costing.

The controller determined that selling and administrative expenses consisted of two activities: sales order processing and post-sale customer service. The controller was able to determine the activity base and activity rate for each activity, as follows:

Activity	Activity Base			Activity Rate
Sales order processing	Sales orders		$65	per sales order
Post-sale customer service	Service requests		$200	per customer service request

The controller determined the following activity-base usage information about each product:

	Generators		Air Compressors
Number of sales orders	3,000		4,000
Number of service requests	225		550

a. Determine the activity cost of each product for sales order processing and post-sale customer service activities.

	Sales Order Processing Activities Cost		Post-sale Customer Service Activities Cost
Generators	$		$
Air Compressors
Total	$		$

Feedback

a. Calculate for each product:
Activity-Base Usage x Activity Rate = Activity Cost. Add both costs to obtain the total for each activity.

Learning Objective 5.

b. Use the information in (a) to prepare a complete product profitability report dated for the year ended December 31. Calculate the gross profit to sales and the income from operations to sales percentages for each product. Round percentages to two decimal places. Enter all amounts as positive numbers.

Naper Inc.
Product Profitability Report
For the Year Ended December 31
	Generators	Air Compressors	Total
Revenues	$	$	$
Cost of goods sold
Gross profit	$	$	$
Sales order processing	$	$	$
Post-sale customer service
Total selling and administrative expense	$	$	$
Income from operations	$	$	$
Gross profit as a percentage of sales	%	%
Income from operations as a percentage of sales

Answer 1

a
	Sales Order Processing Activities Cost	Post-sale Customer Service Activities Cost
Generators	195000	45000
Air Compressors	260000	110000
Total	455000	155000
b
Naper Inc.
Product Profitability Report
For the Year Ended December 31
	Generators	Air Compressors	Total
Revenues	4200000	3000000	7200000
Cost of goods sold	2940000	2100000	5040000
Gross profit	1260000	900000	2160000
Sales order processing	195000	260000	455000
Post-sale customer service	45000	110000	155000
Total selling and administrative expense	240000	370000	610000
Income from operations	1020000	530000	1550000
Gross profit as a percentage of sales	30.00%	30.00%
Income from operations as a percentage of sales	24.29%	17.67%
Formulas used for a:
	Sales Order Processing Activities Cost	Post-sale Customer Service Activities Cost
Generators	=3000*65	=225*200
Air Compressors	=4000*65	=550*200